Oct 7 The Oil Sands Weekly

Oil & gas loss expected to reach $10 billion in 2016 . . .

The Conference Board of Canada (CBOC) expects Canada’s oil extraction industry to lose $10 billion this year, down from a record loss of $11 billion in 2015. The CBOC cites low oil prices but also blames the energy sector for insufficient cost cutting. This will be the largest back-to-back yearly loss for the industry but the agency expects a return to balance next year.

The CBOC calculates energy investments will have been cut by $38 billion between 2014 and 2017, which it expects will translate into lower oil production. Canadian oil production will contract this year for the first time since 2008 due to outages caused by the Fort McMurray wildfires. The board is forecasting a West Texas price of US$67 by 2020.

Federal Liberals not so cooperative when it comes to carbon pricing . . .

The federal government dropped a bombshell this week, announcing a minimum carbon price of $10 per tonne of CO₂e in 2018, rising $10 a year up to $50/tonne in 2022. Prime Minister Trudeau made the announcement in Ottawa while provincial and territorial environment ministers were in Montreal discussing carbon pricing with the federal environment minister.

Provinces and territories who do not already have something in place will have to choose between cap-and-trade and carbon pricing by 2018. Provinces would get to keep the revenues and decide how to spend the cash.

The $50/tonne carbon price, if implemented, would be the highest outside of select Scandinavian countries (namely Sweden, Switzerland and Finland). However, most of those countries have generous exemptions and loopholes for polluting industries or a hybrid carbon-trading system for big emitters. The US does not have a federally-mandated minimum carbon price, leaving it up to individual states. Even left-leaning candidate Hillary Clintonhas refused to endorse a carbon-pricing strategy, which is politically very unpopular in the US.

A carbon price of $50/tonne works out to about 11¢/litre of gasoline. Note that GST/HST is levied on top of the carbon tax and all existing federal, provincial and municipal excise taxes. Natural gasprices will increase by about $2.5/GJ, effectively double the current spot price. Coal-fired power plants will be hit the hardest, making them economically unfeasible.

Federal Environment Minister Catherine McKenna insists Canadians are united in their view that "climate change is one of the defining issues of this century and they expect their governments to lead the way and take action." The provinces remain hopeful that the Trudeau Liberals are open to negotiations.

Saskatchewan’s Environment Minister Scott Moecalled the new tax a repeat of Pierre Trudeau’s National Energy Program, which decimated energy producing provinces in the 1980s.

#BoycottTelus - why business and politics don't always mix . . .

Telus got into hot water this week after it tweeted its support for the federal government's national carbon price. Several prominent Albertans, including BrettWilson and MP TomKmieccalled on fellow-Albertans to cancel their Telus subscriptions. Telus is of one of 22 Canadian companies that signed on to the Smart Property pledge, promising to boost Canadian competitiveness, innovation, and environmental performance through decarbonization. Smart Prosperity is the brainchild of Ottawa-based Sustainable Prosperity, also focused on investments for the green economy. Telus later apologized for the tweet, saying it had not intended to sound political or partisan.

Trump or Clinton - bad for Canada either way . . .

Nomura economist and FX strategist CharlesSt-Arnaudpredicts that Canada will be in trouble post-US election, regardless of who gets voted into the White House. Clinton would be less damaging than Trump, but would still be bad for Canada given her opposition to the Trans-Pacific Partnership. However, Trump has promised to abandon North American Free Trade Agreement (NAFTA) which has greatly benefited Canada . However, Wilbur Ross, one of Trump's economic advisor insists that Trump actually likes Canada and is more interested in stopping the flow of jobs to Mexico.

This week's Canadian energy news . . .

Calgary-based Pengrowth Energy announced a 63% increase in the value of its Lindbergh property located just south of Cold Lake, AB. The increase reflects the government's recent approval of the Lindbergh expansion to 30,000 bbl/day and better than expected operational performance at its exiting commercial pilot facility. P1 reserves were increased 43% to 147.9 billion barrels. P2 reserves were revised higher by 21% to 319.1 billion barrels. Q2 production at Lindbergh's commercial pilot averaged 15,500 bbl/day at an average steam-to-oil ratio of 2.35. The study was conducted by GLJ Petroleum Consultants.

Trilogy Energy discovered a leak in one of its crude oil pipelines within its Kaybob Montney Oil Development, about 15 km from Fox Creek, AB. The damaged section of pipe has been isolated and the company has commenced clean up. Production from the pipeline has been redirected. The cause and volume of oil spilled is still under investigation.

An Alberta court has ordered ApacheCanadato pay $350,000 in penalties for spills that occurred in 2013 and 2014. The company pleaded guilty to two counts of failing to properly operate its pipelines. About 1.8 million litres of salty water was spilled near Zama City, AB after a bison allegedly crushed a section of pipe. Another 2 million litres of water were spilled near Whitecourt, AB which the company blamed on a poorly-sized pressure valve. Most of the funds will go to Alberta Innovates Technology Futures for research into soil remediation. Apache Canada is a subsidiary of Houston-based Apache Corporation.

Alliance Pipelineannounced it will be shutting down its Alliance natural gas pipeline for 7 days starting October 12, while new sections of pipe are installed around Regina, SK. Alliance Pipeline is a joint venture between Enbridge and Veresen and normally transports approximately 1.7 billion cubic feet per day of natural gas from Alberta and BC into the Chicago area.

The National Energy Boardhas recommended approval of the Towerbirch Expansion Project, an 88km section of natural gas pipe in northwestern Alberta and northeastern BC. The line is operated by NOVA Gas Transmission, a subsidiary of TransCanada. The federal government has commenced public consultations to determine greenhouse gas emissions and ensure all stakeholders were properly consulted.

This week's notable economic data . . .

In their latest Business Outlook Survey, the Bank of Canada (BoC) sees signs of a bottom in the country's resource sector and improvement in non-energy pockets of the economy. The BoC expects foreign exports to pick up but warns of a weaker-than-expected US economy.

A sharp drop in foreign oil imports and rise in energy exports helped narrow Canada's trade deficit in August. According to Statistics Canada, overall exports increased 0.6% to $43.4 billion, reducing the national trade deficit from $2.2 billion in July to $1.9 billion in August. Among the key highlights:

Non-US exports rose 7.7%, the largest monthly increase since May 2014.

Statistics Canada reported that 67,000 jobs were added during the month of September, much more than expected. However, most of those jobs (44,000) were part-time. Canada's unemployment rate held stead at 7%. Wage growth is just 1.4% y/y, far below the rate of inflation. Employment in Alberta rose by 13,000 in September. The province's unemployment rate was unchanged at 8.5%, as more people re-enter the labour force. Saskatchewan's unemployment rate rose 0.5% hitting a new high of 6.8%.

In its October World Economic Outlook, the International Monetary Fund (IMF) delivered another gloomy forecast, warning that "persistent stagnation in advanced economies could further fuel anti-trade sentiment, stifling growth." Among the key highlights:

The IMF projects global growth will average 3.1% in 2016 (unchanged from it July forecast), rising to 3.4% next year.

US growth was downgraded from 2.2% to just 1.6% this year.

Canada's growth rate was cut to 1.2% in 2016 and 1.9% in 2017, down 0.2% from its July forecast, dragged lower by a feeble US economy.

A hard Brexit and Trump victory would further deteriorate the global economy.

The agency calls on all nations to maintain "easy monetary policies" and advises against any attempts to increase interest rates. The IMF also expressed concerns over the US$152 trillion in outstanding global debt, which represents 225% of GDP. About 85% of that debt is owned by governments.

This week's US energy news . . .

North Carolina-based Nucor has purchased 49% of Encana'sleasehold interest covering approximately 54,000 acres in Colorado's South Piceance Basin. In exchange, Nucor has sold its 50% equity interest in Hunter Ridge Energy Services to Encana. Hunter Ridge is a gas gathering and water service provider formed by Nucor and Encana in 2012 to support the well development in the North Piceance Basin. Nucor is North America's largest recycler, primarily focused in the manufacturing of steel products.

Marathon Oil has divested various conventional assets in Texas and New Mexico for US$235 million. The properties produce an average of 4,000 boe/day. Since August of last year, divestitures at the company have totalled over US$1.5 billion.

Shell has abandoned plans to build a crude-by-rail terminal near Anacortes in WashingtonState. The terminal would have brought light oil from the Bakken field in North Dakota, displacing dwindling supply from Alaska'sNorthSlope. Shell's PugetSound refinery receives a significant volume of Alberta crude via the TransMountain line.

Privately-held Caelus Energyclaims to have made a huge oil discovery in Alaska's Smith Bay, about 300 miles north of the Arctic Circle. The company estimates the deposit contains between 1.8 billion and 4 billion barrels of recoverable light oil, making it one of the biggest discoveries in recent years. Alaska's declining production from the North Slope is putting the Trans Alaska Pipeline at risk of shutdown. Production from Smith Bay could extend the life of the pipeline. Caelus estimates the there could be as much as 6 billion barrels of oil under Smith Bay, almost doubling Alaska's current reserves. Shell recently abandoned plans for Alaskan deep water exploration after spending US$7 billion and coming up dry.

Hurricane Matthewdisrupted oil shipments into the US Atlantic Coast, resulted in gas shortages in certain parts of the region. Two million people in Florida, Georgia, South Carolina and North Carolina were put under evacuation order late in the week. Several major southern ports were closed, preventing oil and gas imports from overseas. The lower Atlantic region of the US does not have any operating refineries. Gasoline stockpilesdeclined sharply at the end of September due to a temporary shutdown of the Colonial Pipeline, which supplies more than half of the area's gasoline demand. Matthew is expected to make landfall in Florida as a Category 3 storm, which would make it the most powerful since 2005. The US Energy Information Administration (EIA) has released a real-time energy disruption map for the area.

Elsewhere in the world . . .

BP spilled an estimated 600 barrels of oil into the North Sea from the Clair platform, 75 km west of the Shetland Islands. Production was stopped within an hour of the incident. The platform remains offline pending investigation.

BP also announced plans to set up 3,500 gas stations in India. The country already has a similar agreement with Royal Dutch Shell.

A consortium led by Exxon Mobil was fined US$75 billion in a Chad court over unpaid royalties. The court ruled that the group owes the government about US$800 million and demanded an immediate payment of US$670 million pending appeal. No reason was given for the US$74.2 billion penalty. A spokesperson for Exxon says the company disagrees with the ruling and is evaluating next steps. Chad produces about 120,000 bbl/day of oil it exports via pipeline through neighbouring Cameroon.

BP and its partners also formalized an agreement to purchase 100% of the LNG produced by the Coral South Floating LNG facility to be construction off the coast of Mozambique. A final investment decision is expected by the end of the year. The 3.3 million tonnes/year facility will be operated by a subsidiary of Eni. Terms of the deal were not disclosed.

Despite a narrow defeat overturning Columbia's peace plan with FARC rebels last week, Juan Carlos Echeverry, CEO of state-owned Ecopetrol, insists the future still looks bright for Columbia's energy sector. The country has a conservative forecast US$50 WTI for the next 4 years and expects its production to grow from 715,000 to as much as 800,000 bbl/day. Investments in the country's energy patch is expected to be somewhere in the range of US$3.0 to US$3.5 billion. Columbia has both onshore and offshore oil and gas reserves which it develops jointly with most of the world's largest oil companies, including several Canadian firms.

Members of the International Civil Aviation Organization (ICAO) committed to capping CO2 emissions from international flights at 2020 levels. Airlines that pollute more than the 2020 limit would have to purchase carbon-offset credits. The International Air Transport Association, which represents more than 200 airlines, called it a “momentous agreement.” Compliance will be voluntary beginning 2021 but become mandatory in 2027. ICAO estimates that the cost will be somewhere between US$5.3 to US$23.9 billion per year by 2035, depending on the price of carbon at the time. Global airlines spent US$181 billion on fuel last year. Aviation accounts for 2% of global GHG emissions. Federal Transport Minister Marc Garneauwelcomed the deal but warned ticket prices could rise by up to 1.5%.

The European Parliament has approved ratification of the Paris climate deal, allowing the accord to formally take-effect by early November. The EU’s 28 nations account for 12% of the world's GHG emissions.

US IMPORTS OF CANADIAN CRUDE

million bbl/day  preliminary data by EIA

US OIL INVENTORIES

million bbls  data by EIA

US OIL PROD'N & RIG COUNT

million bbl/day  data by EIA & Baker Hughes

3,305k

+111 ▲ 3.5%BBL/D CDN EXPORTS TO US

8,467k

-30 ▼ 0.4%BBL/D US PROD'N

499.74M

-2.98 ▼ 0.6%BBL US INVENTORY

428

+3 ▲ 0.7%US RIG COUNT

CHANGE WK/WK &nbsp

Fitch warned this week that a substantial amount of shale oil could come back online if WTI prices remain solidly above US$55 a barrel. The ratings agency pointed that oil rig counts have jumped by 109 over the past 14 weeks and there remains a healthy supply of drilled-but-uncompleted-wells (DUCs) in the US. Fitch believes US shale is among the most price-sensitive and fast-responding oil producing region in the world, which would limit any future gains in oil prices.

Reuters is reporting that OPEC production likely hit a record high on September, thanks to higher output from Libya, Nigeria, Iraq and Iran. A survey based on shipping data suggests that production from the cartel rose to 33.60 million bbl/day last month, up from 33.53 million bbl/day in August. S&P Global Platts is reporting that production dipped slightly in SaudiArabia, Angola, Qatar and Venezuela.

OPEC committed to a production ceiling of 32.5 to 33.0 million bbl/day at their meeting in Algeria last week. Russian Energy Minister AlexanderNovaksays his country expects an output freeze deal could be reached before the November OPEC meeting in Vienna, but no deal is expected at next week's World Energy Congress in Istanbul.

CURRENCIES  WEEKLY CLOSE

Friday close  data by Bank of Canada & ICE

96.65

+1.26 ▲ 1.3%USD INDEX

75.27

-0.96 ▼ 1.3%CDN DOLLAR

1.73%

+0.13 ▲ 8.1%US 10Y Bond

1.17%

+0.17 ▲ 17.0%CDN 10Y Bond

CHANGE WK/WK &nbsp

Fears of a hard Brexit sent the pound Sterling to a 30 year low and the FTSE to new highs. A mini-flash crash overnight Thursday took the pound to historic low of $1.18 before recovering slightly on Friday.

Various fed chairs from the across the US have signalled strong desires to raise interest rates in December, sending bond prices lower and boosting the US dollar.

The Canadian dollar disconnected from oil prices this week, decisively breaking below 75.5¢ and reaching lows not seen since late March.

OIL PRICES  WEEKLY CLOSE

Friday close, USD/bbl  data by CME Group

51.93

+2.87 ▲ 5.8%BRENT USD/BBL

49.81

+1.57 ▲ 3.3%WTI USD/BBL

46.86

+1.67 ▲ 3.7%CDN LT USD/BBL

36.06

+1.82 ▲ 5.3%WCS USD/BBL

CHANGE WK/WK &nbsp

Maintenance work at BP's Whiting Refinery in Indiana and Exxon Mobil's Joliet Refinery in Illinois caused gas prices to spike in the US Midwest. Some parts of the Canadian prairies saw overnight price increases of up to 0.14¢/L.

West Texas prices peaked above US$50/bbl on Thursday for the first time since late June.

Henry Hub natural gas prices ended the week firmly above US$3/MMbtu. Canadian and US gas prices have reached fresh new highs on strong power demand in the US and hopes of a colder-than-normal winter.

ENERGY SECTOR PERFORMANCE

Friday close  data by TSX & NYSE

CANADIAN & US EQUITIES

Friday close  data by TSX & NYSE

SECTOR SUMMARY

Friday close  data by TSX & NYSE

TSX ENERGY STOCKS  WEEKLY CHANGE

NYSE ENERGY STOCKS  WEEKLY CHANGE

Inter Pipelineannounced the reinstatement of their Premium Dividend under the Dividend Reinvestment Plan (DRIP). Additional common shares will be at a 3% discount to the average market price. DRIP was scaled back in September of 2014.

Bellatrix Explorationannounced the sale of $10 million worth of flow-through shares through a bought deal. Proceeds will be used to fund the company's expenditures through the end of 2016.

Former Canadian energy mogul Murray Edwardspurchased a 9.5% stake in Canexus this week, allegedly for investment purposes. Canexus is in the process of evaluating a hostile takeover from chemicals giant Chemtrade.

In its investor day presentation to shareholders, Encana claims to have saved an extra $50 million so far this year, mostly in operating, transport and processing costs. Total capital investment in 2016 is expected to be $1.1 to $1.2 billion. The company also updated its 2016 guidance forecast.

Calgary-based Enerplus has put its Marcellus shale natural gas assets up for sale. The properties are worth an estimated US$500 million. The divestiture will help Enerplus pay down debt and better focus on its liquids production in the Canadian Waterfloods and North Dakota's Williston Basin.